FNMA and FMCC preferreds. In search of the elusive 10 bagger.

[muscleman]

But Simplistically Speaking.... If I have a company that absent the sweep is worth $100 Billion, if they raise an additional $100 Billion, as a standing shareholder, I am diluted by 50%. 

 

 

That's not true.

Let's say the company is earning $100, and total outstanding shares 100. so EPS is $1. Let's say the stock trades at 10 per share, for a P/E of 10.

If the company issues 100 shares at 10 per share, there is $1000 in the balance sheet.

So now, EPS is reduced to $0.5, but cash per share increased by $5.

For simplicity's sake, let's just say the company uses this extra $1000 to buy back 100 shares. Then total shares outstanding is back to 100, and EPS back to $1.

 

My point here is that equity offering at a reasonable price does not dilute shareholders. Equity offering at elevated valuations actually enhance shareholder value.

 

 

[Guest cherzeca]

But Simplistically Speaking.... If I have a company that absent the sweep is worth $100 Billion, if they raise an additional $100 Billion, as a standing shareholder, I am diluted by 50%. 

 

 

That's not true.

Let's say the company is earning $100, and total outstanding shares 100. so EPS is $1. Let's say the stock trades at 10 per share, for a P/E of 10.

If the company issues 100 shares at 10 per share, there is $1000 in the balance sheet.

So now, EPS is reduced to $0.5, but cash per share increased by $5.

For simplicity's sake, let's just say the company uses this extra $1000 to buy back 100 shares. Then total shares outstanding is back to 100, and EPS back to $1.

 

My point here is that equity offering at a reasonable price does not dilute shareholders. Equity offering at elevated valuations actually enhance shareholder value.

 

my only thought is that most issuers use stock issuance proceeds to invest in expanding their businesses, and try to get a high return on capital.  not so with GSEs.  they are already humming along in full mode, so that stock proceeds will be used to pay down debt, lower leverage...which is good, extra capital is needed, but this is not the situation where dilution is not an issue because in most situations if the proceeds are put into highly productive use the new stockholders may be adding rather than diluting the pie

[muscleman]

But Simplistically Speaking.... If I have a company that absent the sweep is worth $100 Billion, if they raise an additional $100 Billion, as a standing shareholder, I am diluted by 50%. 

 

 

That's not true.

Let's say the company is earning $100, and total outstanding shares 100. so EPS is $1. Let's say the stock trades at 10 per share, for a P/E of 10.

If the company issues 100 shares at 10 per share, there is $1000 in the balance sheet.

So now, EPS is reduced to $0.5, but cash per share increased by $5.

For simplicity's sake, let's just say the company uses this extra $1000 to buy back 100 shares. Then total shares outstanding is back to 100, and EPS back to $1.

 

My point here is that equity offering at a reasonable price does not dilute shareholders. Equity offering at elevated valuations actually enhance shareholder value.

 

my only thought is that most issuers use stock issuance proceeds to invest in expanding their businesses, and try to get a high return on capital.  not so with GSEs.  they are already humming along in full mode, so that stock proceeds will be used to pay down debt, lower leverage...which is good, extra capital is needed, but this is not the situation where dilution is not an issue because in most situations if the proceeds are put into highly productive use the new stockholders may be adding rather than diluting the pie

 

 

Yeah that's true to be an immediate dilution. However, these two twins can't seem to expand their business or use the earnings for other things, so after the 100 bn capital injection, they'll have to use their earnings  to either pay a high dividend to the common or buy back shares. So sooner or later what  I described above will happen.

 

Regardless, it should be good for the preferreds.

[allnatural]

Calabria speech from today: https://www.fhfa.gov/Media/PublicAffairs/Pages/Prepared-Remarks-of-Dr-Mark-A-Calabria-Director-of-FHFA-at-HUD-and-NAHBs-Innovative-Housing-Showcase.aspx

 

"So, I will be taking administrative action where I can. And I will be consulting with Congress, the Administration, and other regulators wherever necessary. "

[beaufort]

Does anyone recall what the tax treatment was for investors in the prefs who converted to common in Citi and AIG? Was it a tax free rollover with the ACB adjusted across newly issued shares or was there a deemed disposition with associated CG taxes?  Please identify whether for IRS or CRA. 

 

     

[Guest cherzeca]

Does anyone recall what the tax treatment was for investors in the prefs who converted to common in Citi and AIG? Was it a tax free rollover with the ACB adjusted across newly issued shares or was there a deemed disposition with associated CG taxes?  Please identify whether for IRS or CRA. 

 

   

 

an equity for equity of the same issuer swap is not taxable

[beaufort]

@cherzeca

Thanks for the response. 

 

Moelis has the re listing of both Fannie and Freddie ahead of the secondary offering, which Calabria has said will be in early 2020.  How long does it take before announcing an intention to list on a major exchange to to get listed and start trading? 

[DRValue]

Does anyone recall what the tax treatment was for investors in the prefs who converted to common in Citi and AIG? Was it a tax free rollover with the ACB adjusted across newly issued shares or was there a deemed disposition with associated CG taxes?  Please identify whether for IRS or CRA. 

 

   

 

an equity for equity of the same issuer swap is not taxable

 

Thanks for the question and the answer. I have been wondering this and i like the answer. Now i just hope it applies in the UK...

[Guest cherzeca]

@cherzeca

Thanks for the response. 

 

Moelis has the re listing of both Fannie and Freddie ahead of the secondary offering, which Calabria has said will be in early 2020.  How long does it take before announcing an intention to list on a major exchange to to get listed and start trading?

 

should happen quickly as these companies are mature and very profitable

[muscleman]

Chris, is the 5 month estimate on the en banc the median time for all other en banc cases, or is it the longest? Sorry for the dumb question.

[Guest cherzeca]

Chris, is the 5 month estimate on the en banc the median time for all other en banc cases, or is it the longest? Sorry for the dumb question.

 

Thompson said it was the median for all 5th cir en banc rehearings

[muscleman]

Chris, is the 5 month estimate on the en banc the median time for all other en banc cases, or is it the longest? Sorry for the dumb question.

 

Thompson said it was the median for all 5th cir en banc rehearings

 

 

Thank you! Hmm.... Did he say what the longest is? I kinda suspect that this one will lean toward the longest.

[Jcmeg35]

Has anyone read this or seen any other coverage about it?

 

"@POLITICOPro

Jun 3

FHFA director to seek more powers from Congress this month. @KatyODonnell_ has more http://bit.ly/2Wlupid"

[allnatural]

Amazing how clueless some people are

 

[Jcmeg35]

Amazing how clueless some people are

 

 

This is a bit more on the "analysts" take: https://www.bloomberg.com/news/articles/2019-06-06/any-fannie-freddie-ipo-would-be-years-off-raymond-james-says

 

Agree @allnatural, he seems pretty out to lunch

[investorG]

Amazing how clueless some people are

 

 

even if his analysis is off base, his conclusion on timing might not be, unfortunately.  after reading tim rood's twitter commentary yesterday about involving congress, I'm guessing the early feedback from investors is that raising ~$100bn+ is going to be harder than some expected without a congressional foundation.  In theory this issue could be somewhat addressed if FnF exit conservatorship in advance or in conjunction with the first potential large capital raise, but I'm not sure if this is logistically possible.

[Guest cherzeca]

Amazing how clueless some people are

 

 

even if his analysis is off base, his conclusion on timing might not be, unfortunately.  after reading tim rood's twitter commentary yesterday about involving congress, I'm guessing the early feedback from investors is that raising ~$100bn+ is going to be harder than some expected without a congressional foundation.  In theory this issue could be somewhat addressed if FnF exit conservatorship in advance or in conjunction with the first potential large capital raise, but I'm not sure if this is logistically possible.

 

disagree.  assuming that treasury sometime this month issues a plan that calls for a recap and release of GSEs, then it will be done...painfully, with great difficulty, probably at lower issue price than moelis blueprint assumes etc, but it will begin once FHFA sets capital target.  now when it ends I wouldn't care to predict, but it will start with deliberate speed, assuming treasury issues the plan that I think it will, and Calabria starts working and stops talking

 

EDIT:  there is inertia to overcome and many investors will have doubts.  but once the ball starts rolling, there will be increasing momentum, not least of which is massive fees for Wall Street.  from start to finish, this will be a deal of the decade for Wall Street, and assuming we don't go into a recession and that stock market doesn't tank, this will get done

[allnatural]

There is regulatory risk investing in any industry today. At an attractive enough valuation, investors will be willing to underwrite that low probability risk that congress wakes up one day in 5-10 years and decides to alter the charters in some manner. But it all comes back to one conclusion, which is the same reason they havent been able to do anything for the last decade.

 

T I N A

 

Once the recap and release is up and running and the companies are fully capitalized in 2 years, which congressman dare want to risk upsetting the housing market? We will be at the point of no return. No one will want to touch this issue. Its political suicide.

[Guest cherzeca]

regulatory risk is of course real re GSEs, but once the recap/release process begins I don't see congress getting involved.  certainly not until 2021, given that mad maxine will not dance with the administration no matter what.

 

don't lose sight of the fantastic investment characteristics of the GSEs.  duopoly, huge barrier to entry (even if congress authorizes new charters, who in his right mind will do a startup against two $5T in aggregate behemoths?), better recurring revenue characteristics than even MSFT with license subscriptions (Ackman called it having a participating interest in 50% of the outstanding US mortgages).

 

terms will likely be less than optimal for current investors, but given current prices, good enough. 

[investorG]

Amazing how clueless some people are

 

 

even if his analysis is off base, his conclusion on timing might not be, unfortunately.  after reading tim rood's twitter commentary yesterday about involving congress, I'm guessing the early feedback from investors is that raising ~$100bn+ is going to be harder than some expected without a congressional foundation.  In theory this issue could be somewhat addressed if FnF exit conservatorship in advance or in conjunction with the first potential large capital raise, but I'm not sure if this is logistically possible.

 

disagree.  assuming that treasury sometime this month issues a plan that calls for a recap and release of GSEs, then it will be done...painfully, with great difficulty, probably at lower issue price than moelis blueprint assumes etc, but it will begin once FHFA sets capital target.  now when it ends I wouldn't care to predict, but it will start with deliberate speed, assuming treasury issues the plan that I think it will, and Calabria starts working and stops talking

 

EDIT:  there is inertia to overcome and many investors will have doubts.  but once the ball starts rolling, there will be increasing momentum, not least of which is massive fees for Wall Street.  from start to finish, this will be a deal of the decade for Wall Street, and assuming we don't go into a recession and that stock market doesn't tank, this will get done

 

the main risk, imo, is that multiple capital raises would be needed.  that means the first tranche of investors are exposed to what you describe - an economic or market shock that could derail the completion of the project and leave them in conservatorship much longer than planned.  thus, the first new investors would require imo a deal they couldn't refuse, which possibly means either a very low investment price and/or the gov't giving up both the sr pref and perhaps a good bit of option value.  it would be easier if the capital requirement was say 50bn in total and in theory they could get out of conservatorship soon after the first and only equity raise. 

[allnatural]

The number being floated today is $100b-$125b. $6b on the balance sheets today + 2 years of retained earnings gets you $50b. Leaving $45-70b needed in a capital raise. How many capital raises do you think it will take to achieve that? Petrobras raised $70b in one shot (offering was actually oversubscribed!) and thats a much worst business. At an attractive enough valuation that capital raise will get swooped in one shot.

 

Amazing how clueless some people are

 

 

even if his analysis is off base, his conclusion on timing might not be, unfortunately.  after reading tim rood's twitter commentary yesterday about involving congress, I'm guessing the early feedback from investors is that raising ~$100bn+ is going to be harder than some expected without a congressional foundation.  In theory this issue could be somewhat addressed if FnF exit conservatorship in advance or in conjunction with the first potential large capital raise, but I'm not sure if this is logistically possible.

 

disagree.  assuming that treasury sometime this month issues a plan that calls for a recap and release of GSEs, then it will be done...painfully, with great difficulty, probably at lower issue price than moelis blueprint assumes etc, but it will begin once FHFA sets capital target.  now when it ends I wouldn't care to predict, but it will start with deliberate speed, assuming treasury issues the plan that I think it will, and Calabria starts working and stops talking

 

EDIT:  there is inertia to overcome and many investors will have doubts.  but once the ball starts rolling, there will be increasing momentum, not least of which is massive fees for Wall Street.  from start to finish, this will be a deal of the decade for Wall Street, and assuming we don't go into a recession and that stock market doesn't tank, this will get done

 

the main risk, imo, is that multiple capital raises would be needed.  that means the first tranche of investors are exposed to what you describe - an economic or market shock that could derail the completion of the project and leave them in conservatorship much longer than planned.  thus, the first new investors would require imo a deal they couldn't refuse, which possibly means either a very low investment price and/or the gov't giving up both the sr pref and perhaps a good bit of option value.  it would be easier if the capital requirement was say 50bn in total and in theory they could get out of conservatorship soon after the first and only equity raise.

[investorG]

The number being floated today is $100b-$125b. $6b on the balance sheets today + 2 years of retained earnings gets you $50b. Leaving $45-70b needed in a capital raise. How many capital raises do you think it will take to achieve that? Petrobras raised $70b in one shot (offering was actually oversubscribed!) and thats a much worst business. At an attractive enough valuation that capital raise will get swooped in one shot.

 

Amazing how clueless some people are

 

 

even if his analysis is off base, his conclusion on timing might not be, unfortunately.  after reading tim rood's twitter commentary yesterday about involving congress, I'm guessing the early feedback from investors is that raising ~$100bn+ is going to be harder than some expected without a congressional foundation.  In theory this issue could be somewhat addressed if FnF exit conservatorship in advance or in conjunction with the first potential large capital raise, but I'm not sure if this is logistically possible.

 

disagree.  assuming that treasury sometime this month issues a plan that calls for a recap and release of GSEs, then it will be done...painfully, with great difficulty, probably at lower issue price than moelis blueprint assumes etc, but it will begin once FHFA sets capital target.  now when it ends I wouldn't care to predict, but it will start with deliberate speed, assuming treasury issues the plan that I think it will, and Calabria starts working and stops talking

 

EDIT:  there is inertia to overcome and many investors will have doubts.  but once the ball starts rolling, there will be increasing momentum, not least of which is massive fees for Wall Street.  from start to finish, this will be a deal of the decade for Wall Street, and assuming we don't go into a recession and that stock market doesn't tank, this will get done

 

the main risk, imo, is that multiple capital raises would be needed.  that means the first tranche of investors are exposed to what you describe - an economic or market shock that could derail the completion of the project and leave them in conservatorship much longer than planned.  thus, the first new investors would require imo a deal they couldn't refuse, which possibly means either a very low investment price and/or the gov't giving up both the sr pref and perhaps a good bit of option value.  it would be easier if the capital requirement was say 50bn in total and in theory they could get out of conservatorship soon after the first and only equity raise.

 

I doubt new investors prefer to wait 2 years to exit conservatorship.  So I discount the retained earnings you mentioned.  I'd guess $100-$125bn needs to be raised over 1 year in two or (more likely) three deals.  pure guess though.  the best way would be a validating private equity taking down half and then a re-IPO / exit from conservatorship several months later.  back to my original point, it'd be much easier to convince the early new $ to participate if congress blessed the plan in some form.  whether that's possible, my guess is we'll see at some point bc it's likely going to be tried to reduce odds of a failed deal. 

[allnatural]

Why wouldn't new investors be ok waiting? The more capital raised/shares issued, the more dilution to all participants. AIG also took a couple years to fully exit government control. And for the reasons mentioned by cherzeca and I, I don't believe Congress is a real risk here once the plan is in motion (but investors will still get paid for that perceived risk by getting access to the investment at dirt cheap valuation). The AIG blueprint is there, lets not over complicate this.

 

Calabria already discussed this as the most likely scenario, IPO, retain capital for 1-2 years, then exit.

[Midas79]

Why wouldn't new investors be ok waiting? The more capital raised/shares issued, the more dilution to all participants. AIG also took a couple years to fully exit government control.

 

The execution risk rises dramatically once the timeline gets pushed out past the next election. A new president can fire Mnuchin, and will likely have the ability to fire Calabria.

 

I think the entire thing, recap and release, needs to be done in the next 12 months at the most. I don't think Trump wants any part of this hanging over his head going into the campaign and election cycle. Therefore I wouldn't count on more than 4 quarters of retained earnings, and probably less.

 

Do you have more info about the Petrobras offering? If they can oversubscribe $70 billion then FnF should be able to easily hit $120 billion. As cherzeca points out, the price of getting this done quickly is probably a rather low offering price. This is one big reason that I own only prefs, the commons can still come out lower than they are now in the end.

[allnatural]

I can see them expediting it from 18-24 months to 12 months at the expense of legacy common. But again once the recap release is in motion, there is no "firing" the squad and stopping everything in its tracks. The risk outweighs any rewards. You would have to have a better alternative to replace that plan in place before you do such an action, and it would have to pass Congress, all before the recap and release is completed, which is very unlikely for reasons mentioned above. Also FHFA is an independent agency and its within its mandate to execute on this plan / build capital. So far every court has told us you can not challenge their actions, so i'm not sure how you would even halt this  once its signed off on. Especially once the senior pfds are amended in Q3-Q4 according to Calabrias timeline (to stop the NWS and probably write down the senior pfds in connection with settlement). No one will be able to reverse that amendment.

 

PBR info: https://www.reuters.com/article/us-petrobras-offer/brazils-petrobras-poised-for-record-share-sale-idUSTRE68M0AE20100923